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How to Retire Early When You Don’t Make a Lot of Money


How to Retire Early When You Don’t Make a Lot of Money

For some of us, 30 minutes seems too long to wait (especially if it’s lunchtime). But if you’re thinking about retirement when you’re in your 30s, you could be looking at another 30 years.

That’s because at 59½, you can start withdrawing from your retirement accounts without penalty and at 62 you can start taking partial Social Security.

But those days can seem far off, especially if you’re in a job you don’t love and have too many cities unchecked on your travel bucket list.

If you’ve decided you don’t want to wait until your 60s to retire but don’t think you make enough to retire early, then keep reading.

Do You Need a Six-Figure Income to Retire Early?

TL;DR answer: No.

Long answer: The equation for early retirement isn’t just mathematical. If you can commit to learning some basic personal finance concepts, changing behaviors and putting a little extra work in now, you can retire early — even if you don’t make a lot of money.

But that doesn’t mean you can retire early on any lifestyle.

The average household pre-tax income is around $73,000 and the average American household spent around $60,000 in 2017, according to the Bureau of Labor Statistics.

That spending includes expenses you might not have in retirement, like pension contributions, but excludes income tax — which you still have to pay on most retirement account withdrawals — so it’s a reasonable amount to base retirement calculations on.

But if you want to live off of $60,000 for 40 years, you’d have to save almost $2 million before retirement. Which, if you have 20 years to save, would require you to contribute over $2,000 a month to retirement. Feasible for some, but not for all.

8 Steps to Take Now If You Want to Retire Early

If you want to retire before 66 but your income doesn’t allow you to invest thousands of dollars a month, we’ve got eight simple — though not necessarily easy — steps you can use as a starting point to set your retirement planning up for greater success and earlier achievement.

1. Write Down Your Goals For Retirement

Before you start, figure out when and how you want to retire.

Create a projected annual budget for your first year in retirement. Make educated guesses as to how much you’ll travel, whether you’ll have a mortgage, what your healthcare could cost, and what the cost of living in your dream retirement location might be.

Then look at your current budget, and adjust your expenses to determine how much money you’ll need to withdraw that first year. It won’t be 100% accurate, but it’ll give you a goal to shoot for in your savings.

Once you’ve decided what you need every month, you can plug that into a retirement calculator to see how much you need to save every year and for how long.

2. Automate, Automate, Automate

Since you’re trying to retire early, you’ve officially committed to never missing a monthly retirement account contribution again. Congratulations!

But that means you can no longer plan your retirement contributions around what you have left at the end of the month. You have to make them a priority, and the easiest way to do that is to automate your contributions.

Because you’ve already figured out how much you need to have saved, you can figure out how much you’ll need to contribute from each paycheck and set it up as an automatic transaction.

Is that amount too big for you right now? Work up to it. Start with an amount that seems a little uncomfortable and increase it by 1% a month until you get to your goal. You’ll eventually get used to living without that money.

3. Lower Your Living Expenses

Tina Russell/Codetic

Depending on how you’re living, your initial calculations may have said you need upwards of a $2 million nest egg to retire. Want to know how to lower that number?

Lower the amount you’ll need to live on in retirement!

You may spend $60,000 annually now, but what if you could live on $50,000 per year, or $40,000? That would significantly decrease the amount you’d need to save to retire.

Focus on the big things first: housing, transportation, food and taxes.

Get a roommate or rent a room out on Airbnb, buy an affordable used car you can pay off in less than two years, and cook at home more. Adopting these few lifestyle changes can make a bigger difference than a lot of little cost-cutting moves combined.

Also, the more you contribute to your 401(k) — or comparable plan — and HSA (Health Savings Account) each year, the less money you owe in taxes!

You can play around with how much your savings will speed up your retirement by using the “multiply by 25” rule. The rule basically states that once you know the amount you need to live off of in retirement (including contributions to an emergency fund for unexpected costs), multiply that by 25. You’ll achieve financial independence — the ability to live off your investment dividends — once you’ve hit that number.

This rule of thumb is based on the assumption that your retirement will last 30 years, so if you want to retire at 35, you’ll need to adjust those figures if you plan to live past 65.

Using the multiply rule, if you want to withdraw $60,000 every year from your retirement fund without touching the principal, then you’ll theoretically need $60,000 x 25, which is $1.5 million.

But if you can cut your expenses to $45,000 per year, you’ll reach financial independence once you hit $1.125 million. That’s $375,000 less!

If you start cutting your expenses today, you’ll free up money to invest as well. Double win!

4. Increase Your Income Now

If you’ve cut every expense possible and you’re still struggling to increase your savings rate, you might need to increase the amount of money coming in.

If you’re working with a lower income, you can’t afford to wait for raises and promotions to gradually increase your paycheck. If you don’t focus on investing now, you’ll have to save significantly more over time to reach your goals.

Here’s an example of the total you’ll need to invest to reach roughly $113,000 by age 55, as calculated on the Securities and Exchange Commission Compound Interest Calculator.

Age Started Monthly Contribution Total Contributed at Age 55 Balance With 7% annual return
30 $150 $45,000 $113,848
35 $230 $55,200 $113,147
40 $375 $67,500 $113,080
45 $685 $82,200 $113,571

You can see from the example that someone who starts investing at 45 will have to contribute an additional $37,200 by the age of 55 to get the same return as someone who started at 30.

So if lack of income is keeping you from making your monthly contribution goals, ask for a raise or promotion, spend a year doing a side hustle or find another way to help you meet your goal as soon as possible.

5. Pay Off Debt

The market has historically returned 9 to 11% on investments. When we adjust for inflation, that becomes 6 to 8%. Alternately, a new credit card averages 17.2% interest and graduate student loans are running north of 6%.

Having debt of any kind will eat away at your returns over time, but especially any debt with interest rates of 6% or more. Focus on paying these debts off above saving for retirement

6. Optimize Your Retirement Accounts

A lot of people think they need to optimize (or set up accounts for the greatest profitability) before they start investing for retirement. Let’s debunk the myth right now: Saving comes first, optimizing comes second.

People aren’t putting off retirement because they don’t have a perfectly balanced portfolio, the fees are too high or they can’t find a good financial planner. They don’t retire because they haven’t saved enough money.

If you want to retire early, focus on saving first, then learn what will make your savings work harder for you. When you’re ready to start optimizing your portfolio, you’ll find it’s not as hard as might think.

Here are a few ways to optimize your retirement savings:

  1. Get your employer’s 401(k) match.

  2. Open a Roth or traditional IRA (or both!).

  3. Take advantage of the Roth IRA if you’re in a low tax bracket.

  4. Opt for low-cost mutual funds with fees of 1% or lower.

  5. Roll over your old 401(k)s into an IRA to consolidate accounts.

  6. Avoid taking early withdrawals or 401(k) loans.

  7. If you hire a financial advisor, make sure he or she is a Certified Financial Planner with a fiduciary responsibility, which means they are legally obligated to act in your best interest.

That’s all you need to know to build a successful retirement portfolio. If you’re interested in learning even more about investing, check out some of our favorite books on the subject.

Think about diversifying your investments beyond the stock market, too. Investing in real estate or starting your own business aren’t quite as easy as socking money away, but they’re good ways to add a safeguard to your retirement plan.

7. Start a Business

A lot of early retirees don’t think about starting a business, but doing so serves two purposes.

First, if you retire at 50 or 55, you’ve still got a good 20 years of life left, during which you’ll want to stay active mentally and physically. There are only so many cruises and golf games to keep you stimulated.

Second, a business can help you retire earlier than planned. If you do it right, you can rely on extra income from your business (instead of investments) to be your retirement income.

Many retirees will use their years of professional experience to open consulting firms, coaching businesses or other passion projects. Or you can start something totally different than your lifelong gig.

Whatever business you want to launch, start part-time while you’re still working full-time so the business has time to grow, and you can invest money into it gradually.

8. Do Your Best to Stay Healthy

A woman does planks
Tina Russell/Codetic

A major factor to consider in retirement at any age is the cost of healthcare.

Medicare isn’t available until 65, so many early retirees have to consider non-subsidized healthcare. Premiums for family coverage without a government subsidy average a whopping $1,168 per month for an average $8,803 deductible. That can derail the best-made retirement plans.

There’s no way to control the unexpected, but you can do your best to control long-term health risks. The leading causes of health-related death are heart disease, cancer and respiratory diseases. Exercising and eating healthy will go a long way in cutting down your healthcare and life insurance costs over time.

Finding additional income streams, making lifestyle changes and committing to better money habits aren’t quick fixes, but working to save those extra dollars now can help put you on the road to early retirement.

Jen Smith is a former staff writer at Codetic. She and her husband paid off $78,000 of debt in less than two years on two less-than-average salaries. She gives money saving and debt payoff tips on Instagram at @modernfrugality.

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